US to probe BAE over corruption

UK defence firm BAE Systems has said it is the subject of an anti-corruption probe by the US Department of Justice.

According to BAE, the probe will look at its compliance with anti-corruption laws including its business "concerning the Kingdom of Saudi Arabia".

BAE faces allegations that it ran a fund to help it win plane and military equipment orders from Saudi Arabia.

The company, which saw its shares close 7.8% down in London, has always argued that it acted lawfully at all times.

BAE's shares initially dropped 11% but recovered some of those losses in day trading to close 34.5p lower at 407.75p, knocking about £1bn off its market value.

Wide jurisdiction

The allegations of illegal payments by BAE date back to the 1980s and the £43bn ($85bn) al-Yamamah deal that supplied Saudi Arabia with Tornado jets and other military equipment.

Earlier this month, the BBC and the Guardian newspaper reported that BAE had made payments worth hundreds of millions of pounds over a number of years to Prince Bandar, a leading member of the Saudi royal family.

According to the Guardian, the Department of Justice became interested because BAE used the US banking system to transfer regular payments to accounts controlled by Prince Bandar at Riggs Bank in Washington.

As a result, prosecutors decided that BAE could be investigated under the Foreign Corrupt Practices Act (FCPA).

The report by the BBC and Guardian said the payments were discovered during a Serious Fraud Office (SFO) investigation, though that probe was halted in December 2006 on grounds of national security.

Prince Bandar, who is the son of the Saudi defence minister, served for 20 years as US ambassador and is now head of the country's national security council, has "categorically" denied receiving any improper payments.

The SFO is still investigating BAE contracts in Africa, Eastern Europe and South America.

Bigger headache

BBC business editor Robert Peston said that: "The Saudis will not be overjoyed that the Department of Justice is apparently taking up where the serious fraud office left off."

He added that the US probe is "a much bigger headache" for the UK government than for BAE, and it will be Gordon Brown's first big diplomatic dilemma as prime minister.

The BBC's business editor explained that the al-Yamamah contract was between the British and Saudi governments, not between BAE and Saudi Arabia, and that BAE was only the contractor.

"So it will be a decision for the Ministry of Defence, not BAE, whether to disclose the details of the deal," he said.

Analysts said that the probe could lead to delays in BAE signing a new deal, called al-Salam, which would see Saudi Arabia buy 72 Eurofighter jets.

"This is bad for sentiment and could delay the signing of the Salam deal," said Nick Cunningham, an analyst at Panmure Gordon.

Mr Cunningham added that BAE executives could be prosecuted should they have been found to have behaved improperly.

Coming together

Analysts said that the probe in the US could also damage BAE's business in North America.

BAE has been looking to expand its US business and is in the process of buying Armor Holdings, a maker of armoured vehicles, for $4.1bn (£2.1bn).

Last week, the US Treasury found that the takeover did not pose any security threat, and BAE hopes to conclude the deal later this year.

In an effort to reassure policymakers that the company has not indulged in corrupt practices, BAE asked Lord Woolf, the former Lord Chief Justice of England and Wales, to head an independent review of its business practices.

BAE's chairman Dick Olver and the firm's non-executive directors are said to want independent confirmation that BAE behave properly when winning contracts.

A company spokesman said that BAE was "committed to meeting the highest ethical standards in its dealings with others, and doesn't tolerate unethical behaviour or attempts to improperly influence decisions".

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